Investing for Dummies – UK. Levene Tony

or benign neglect.

      So are you an investor? Check out these attributes to find out:

      ✔ You have spare cash.

      ✔ You have an emergency fund for the day the roof falls down or the car collapses.

      ✔ You want more than the bank or building society offers.

      ✔ You think about your money-making strategy and tactics.

      ✔ You can face up to bad days (and there’ll always be some) on investment markets without worry.

      ✔ You’re ready to swap certitude for a bigger potential reward.

      ✔ You can afford to lock away your spare cash for five years at the very least.

      ✔ You understand what you’re doing with your money.

      ✔ You’re prepared to lose money occasionally – knowing it’s an occupational hazard.

      ✔ You’re ready to invest your time into growing your fortune.

      All these attributes belong to an investor.

       Working out where you fit

      So, what’s your bottom-line personality type when it comes to money?

      ✔ You decided you’re an investor. Congratulations! You’re ready to embark on the road to growing your money. It won’t be easy. You may face stiff climbs, vertiginous falls, rocky surfaces, long deviations and dead ends. But give it enough work and time, and I promise that investing will work out.

      ✔ You didn’t qualify as an investor. You got as far as a saver and no further. Or you’re really stuck as a spender. You’re wishing you’d spent the price of this book on something else or stuck it in your savings account, where at the current virtually invisible savings rates it’ll double in about 100 years. Well, don’t regret your purchase or vow to send this book off for recycling, or try to recoup some of the price by selling it in a car boot sale. Stick with it. The very fact that you bought this book shows you’re ready to move on to investing when you’re financially and psychologically ready.

      And even if you decide you never want to buy a share, sell a bond, invest in a unit trust or check on foreign exchange rates, this book is still for you. Why? Because you’re almost certainly an investor already. (The following section tells you how, if I’ve piqued your curiosity.)

Surprise! You’ve Probably Been Investing Already

      Your financial fate already depends on the ups and downs of the stocks and shares markets. Few people can escape this fact, and every day the number of people who can ignore the investment world diminishes. You may be an unconscious investor or even an unwilling one, but there’s no running away from it; you’re already an investor.

       Investing through your pension fund

      The biggest amount of investment money you’re likely to have is the value of your pension fund. And whether you pay into it yourself, rely on your employer or build it up via a partnership with your employer, it all rides on investment markets.

      Just to give you an idea of how much you may have, suppose that you earn £25,000 a year and put 10 per cent of your earnings each month into a pension fund that grows at a 7 per cent average per year. Here’s what your fund is worth over the course of 45 years (I’ve ignored tax relief on pension contributions, future wage rises, inflation, and fund and pension management charges to keep this example simple):

      That’s serious money! And it all started with a first monthly payment of just £208! Of course, the assumptions I make are foolish. No one continues on a flat salary for 45 years – some see earnings soar and others stop work. And although the annual growth rate I’ve used is an average based on the past, whatever happens in the future, it won’t be smooth!

      Most people haven’t a clue that they have the potential for anything like the preceding example over a working lifetime. But even if you’re aware of what you could achieve, I bet you didn’t know that you have a good chance of taking some investment control over that sum. Even if you don’t want to, at the very least you should be able to check up on what the pension fund managers are doing with your money. Understanding what other people are doing with your money can help you increase your own pension fund in good markets and prevent it from going down when the investment world turns sour.

      Note that your pension plan isn’t the only area where you may be an unwitting stocks and shares investor. Endowment mortgages and other investment-linked insurance schemes also revolve around stocks and shares.

       Investing in your employer

      Millions of people are potential and actual investors in the company they work for. Most big stock-market-quoted companies, like British Airways or Wal-Mart’s UK offshoot Asda, offer employees option plans that give workers the chance to acquire a stake in the firm. To acquire that stake, workers buy shares, also known as equities, which I explain in the section ‘Get your share of shares’, later in this chapter.

      The original idea was that giving someone the chance to buy shares in the future at a price fixed in the past would help motivate staff members and make them put in more effort, but in reality the idea only works if all colleagues work equally hard.

      The original idea aside, the option plan is just a pay perk, but one that can be valuable. A variety of schemes are available, but the most common one is linked to a savings account known as Save As You Earn (SAYE). SAYE schemes have a monthly limit to encourage you to tread carefully, because putting all your investment eggs in one basket would be really daft. You don’t want your savings to collapse if your employer goes bust or makes you redundant.

      

In an SAYE scheme, you save from £5 to £500 a month in a special account that earns interest. When you start, you’re given a price, called the exercise price, at which you can buy the firm’s shares in the future. The account continues for three or five years (with an option to go to seven years). At the end, you can use the savings plus interest to buy shares in the firm at the pre-set price. If the price has risen, you make a profit, although you don’t have to sell until you want to. But if the price has dropped, you can walk away from the whole deal with the cash you’ve saved in the account. But you won’t get any interest at the present time – rates are just too low.

      

Some employee share option schemes aren’t a perk. They’re a danger – especially in small companies whose prospects sound brilliant (on paper, at least). You can easily be lured from a well-paid, secure job into risky employment with the promise of share options sometime in the future but a substantially reduced salary now. Most option plans lock in employees for a number of years, and by the time they take their options the shares could be virtually worthless, assuming that the company is still in business. Putting all your eggs in one basket is always an error, so never tie your fortunes so closely to one company. No matter how attractive the deal sounds, a wage packet bird in the hand is worth several options in the bush.

       Being part of the economy

      We’re all part of the investment scene, whether we know it or not. Every time you decide to buy an item or save your money or work harder or work less or go on holiday in the UK or abroad or do nothing, you’re part of the big picture that makes up the economy. You can’t avoid it, so find out how that economy can work for you rather